Sunday, April 21, 2013

The S&P's Worst-Performing Sectors in 2013

With gains of more than 9% so far in 2013, the S&P 500 (SNPINDEX: ^GSPC ) has already posted better returns than it often manages over an entire year. But the past week's downdraft serves as a valuable reminder that you have to be vigilant to spot signs of weakness in the stock market before they blossom into full-fledged corrections. Specifically, looking at particular sectors of the market that are lagging behind the S&P 500's overall performance can help you gauge whether industry-specific trends are holding stocks back or whether those poor conditions are likely to spread into other sectors.

Yesterday's column looked at the best-performing sectors in the S&P so far in 2013. Today, let's turn to the dark side by identifying the laggards in the S&P this year.

S&P 500 Sectors Total Return Price data by YCharts.

Materials have posted the weakest performance, just barely eking out a gain on the year, with technology and energy also falling behind the overall return of the S&P 500. For materials, the slowdown in China has sent commodity producers of all kinds for a loop. In particular, with slower construction activity, U.S. Steel (NYSE: X ) and other steel companies have seen their stocks tumble throughout 2013. That in turn has caused a cascade effect, as coal and iron-ore supplier Cliffs Natural Resources (NYSE: CLF ) has seen less demand for its vital inputs for the steel-making process. Gold's big decline last week only hurt matters by sending precious-metals miners down for the count as well.

Technology, on the other hand, has a more mixed showing of both winners and losers. On one hand, slow PC sales have left older tech companies scrambling to update their offerings and join the mobile revolution, and their stock prices have generally suffered even though they currently trade at unusually low earnings multiples. Yet for more innovative, cutting-edge companies, high valuations have persisted, and the most forward-looking tech players have rewarded their shareholders with solid returns.

Finally, on the energy front, 2013 has been a reversal of fortune, with natural gas prices climbing but oil prices slumping. That trend has been good for more gas-concentrated companies Range Resources (NYSE: RRC ) and Ultra Petroleum (NYSE: UPL ) , but for many players that moved away from gas production to stress more lucrative oil, the new environment has them feeling whipsawed. Overall, better global growth will likely be necessary to drive energy prices higher.

Can these sectors bounce back? Last week's stock market moves called into question whether the bull market will continue, and a reversal could make past trends relatively meaningless. For now, though, materials and energy appear likely to keep suffering from weak economic activity levels around the world, while technology is more of a wildcard and could bounce back more sharply if consumer and business customers feel more confident about investing in new tech products.

Cliffs Natural Resources has reeled from weak demand, with a dramatic 76% dividend cut in February. However, it could now be looked at as a possible value play because of several factors that are likely to remain advantageous for Cliffs' management. For details on these advantages and more, click here now to check out The Motley Fool's premium research report on the company.